Forex reserves break the roof in Feb, grow by $8bn

Sangita Mehta & Gayatri Nayak, TNNMar 14, 2005, 12.58AM IST

MUMBAI: Foreign exchange reserves have seen an unprecedented growth of $8bn in February — the highest for any single month.

This inflow is part of the sea of liquidity being pumped into emerging markets by fund managers, who have extremely negative sentiments about the dollar and are looking for ways to profit from the weakening greenback.

According to data released by the Reserve Bank of India, forex reserves stood at $137.5bn as of March 4, '05, an increase of $8.6bn from February 11. Dealers say that most of these inflows have come in since the second week of February, when the RBI began a frantic purchase of dollars to prevent the rupee from appreciating.

The highest growth in reserves before February '05 was seen in November '04, when reserves rose by $6.8bn.

Confidence in the US dollar is low because of the widening US current account deficit, the shortfall in value between imports and exports plus income from investments and transfer payments.

The US current account deficit expanded by 24% in '04 to a record $617.7bn. The weak dollar psychology has erased the risk premium associated with emerging markets and pushed prices of assets, ranging from real estate to equities

Fund managers are pumping money into various assets, including debt and commodities, in emerging markets. Several Asian countries have seen reserves touching record highs.

South Korea's reserves have grown by $47bn last year to $200bn. China, which has the second-largest foreign currency reserves after Japan, saw its reserves rise to $610bn in December '04, of which $209.9bn came in '04 due to a trade surplus.

Dealers in the foreign exchange market say that foreign institutional investors account for a fourth of the inflows. FIIs had poured in close to $2bn in the equity market and another $190m into debt in February.

This would be followed by exporters bringing in their export proceeds immediately for fear of the dollar weakening further. Besides FII inflows and exports, dollars were brought in by corporates drawing down on external commercial borrowings sanctioned in November-December '05, when corporates raised close to $2.5bn of debt.

Other sources include deposits by NRIs, as they hedge against a weak dollar. Although non-residents have been withdrawing deposits since April '04 after a rate hike by the US Fed, the trend appears to have reversed since September.

NRI deposits stood at $33.7bn in April '04, fell to $31.7bn in September '04 and rose to $32bn in November '04.

Forex dealers said that RBI was seen actively buying dollars from the currencies market since February 8, '05. "The RBI mopped up only the surplus dollars in the system; this is clearly reflected in forwards which have not gone into discounts," said dealers.

"Initially, the RBI may be buying dollars from the forex market to keep a check on REER as it may not be comfortable at 105 level. Even now, as REER has touched 102, the RBI still continues dollar purchases and this could be to ensure that inflows do not unduly strengthen the rupee in a short period," said Manoj Rane, country head - treasurer at BNP Paribas.